2024 (3) TMI 484 - AT - Income Tax

Disallowance u/s 14A - mandation of recording satisfaction to be recorded by the AO - Assessee suo-moto disallowed an expenditure incurred for earning the aforesaid exempt income - HELD THAT - Satisfaction as required to be recorded under the provisions of section 14A of the Act is not limited to merely disagreeing with the submission of the assessee and requires that the AO should also provide the basis for reaching such a conclusion, after having regard to the accounts of the assessee. However, as noted above, in the present case the AO merely proceeded to compute the disallowance u/s 14A read with Rule 8D without examining the correctness of the claim of the assessee regarding expenditure incurred for earning the exempt income. It is evident from the record that the assessee's own funds, i.e. share capital and reserves surplus, are Rs.2487.78 crore, while investment in tax-free securities is only limited to Rs.165.07 crore and therefore it can be presumed that the assessee had sufficient own funds for making the aforesaid investment in tax-free securities. It is also evident from the record that the assessee has computed the suo-moto disallowance on the basis of the salary cost of the designated employees, however, there is no material available on record to show that the AO has recorded the requisite satisfaction to the effect that the computation made by the assessee is incorrect having regard to the accounts of the assessee. Since, in the present case, no proper satisfaction has been recorded by the AO in terms of the provisions of section 14A(2) of the Act, having regard to the accounts of the assessee, about the correctness of the claim of the assessee in respect of expenditure incurred in relation to exempt income, no reason for upholding the disallowance made by the AO u/s 14A read with Rule 8D of the Rules. Accordingly, the same is directed to be deleted. As a result, ground no.1 raised in assessee s appeal is allowed. Disallowance of expenditure incurred on the feasibility study report - HELD THAT - From the perusal of the documents available on record, it is sufficiently evident that the assessee ventured into altogether a new line of business, which is different from the existing business of manufacturing paints and enamels. We agree with the conclusion of the learned CIT(A) that the new line of business operates completely on different domains, as the infrastructure, expertise, workforce and all other connected things engaged and involved are completely different. We find that the entire expenditure of Rs.1,74,40,000 was not incurred on obtaining a feasibility report in respect of home improvement and decor business, therefore we direct the AO to restrict the disallowance only to the extent of expenditure pertaining to home improvement and decor business. As a result, ground no.2 raised in assessee s appeal is partly allowed. TP adjustment - non-recovery of charges for providing the letter of comfort/support - international transaction or not? - TPO noted that the assessee has issued non-contractual letters of comfort/support to banks on behalf of some of its subsidiaries from time to time and has not charged any thing from its associated enterprises - whether the aforesaid letters of comfort issued by the assessee to the banks on behalf of some of its associated enterprises constitute an international transaction within the meaning of the Act? - HELD THAT - From a plain reading of the aforesaid provision, it is evident that for a transaction to be an international transaction it has to be between two or more associated enterprises, either or both of whom are non-residents. Undoubtedly, in the present case, the assessee issued letters of comfort on behalf of its associated enterprises outside India. Thus, in our considered view, the first condition for being an international transaction is satisfied in the present case. It is pertinent to note that the corporate guarantees issued by the assessee have already been accepted to be an international transaction by the assessee in the present case. Such being the facts of the present case, we are of the considered view that the letters of comfort issued by the assessee in respect of the credit facility extended to its subsidiaries by the banks outside India, which has been admitted to be a liability by the assessee and thus have a bearing on the assets, constitutes an international transaction within the meaning of section 92B of the Act. Thus we find no merits in the submission of the assessee that it is not financially obligated to bear the cost of repayment of loans to the banks in case subsidiaries default in repayment, as the assessee itself has treated the credit facility extended to its subsidiaries pursuant to the letters of comfort as its contingent liability. During the hearing, no material was brought on record to controvert the disclosure made by the assessee in its financial statement. Further, from the document of the credit facility extended to Berger International Ltd, Singapore, we find that the credit facility was extended on the security/support of the letter of comfort issued by the assessee. As regards the ALP of the letters of comfort, the TPO considered 0.50% as the arm s length rate (being 50% of 1% fee for guarantee commission). While the learned CIT(A) reduced the arm s length corporate guarantee commission to 0.20%, and the arm s length rate for letters of comfort was also reduced to 0.04% (being 20% of 0.20%). During the hearing, the learned AR without prejudice to the main submission that the letters of comfort issued by the assessee are not an international transaction submitted that the corporate guarantee issued by the assessee cannot be compared with the letters of comfort and therefore agreed with the computation of arm s length rate of 0.04%. Agreeing with the submissions of the assessee, we upheld the findings of the learned CIT(A) in computing the arm s length rate of the letter of comfort to be @0.04%, finding the same to be reasonable in the peculiar facts and circumstances of the present case. Accordingly, ground no.3 raised in assessee s appeal is dismissed. Allowability of expenditure u/s 35(2AB) - on receipt of the certificate in Form No.3CL, the AO granted partial relief to the assessee and restricted the disallowance - HELD THAT - We find that while deciding a similar issue the coordinate bench of the Tribunal in assessee s own case in Asian Paints Ltd 2014 (1) TMI 16 - ITAT MUMBAI as held relevant provisions of the Act did not contain any specific condition that the deduction u/s 35(2AB) and accordingly the claim of the assessee for deduction u/s 35(2AB) will be restricted to the amount of R D expenditure as contained in the certificate. The Tribunal found on verification of the relevant details that even the expenditure is not included in the said certificate was eligible for deduction u/s 35(2AB) in respect of the said expenditure was allowed by the Tribunal. In our opinion, the issue involved in the case of Torrent Pharmaceuticals 2009 (11) TMI 819 - ITAT AHMEDABAD thus is similar to the one involved in the present case and this position is not disputed even by the Id. DR at the time of the hearing before us - Decided against revenue. Restricting the disallowance of damaged stock in the valuation of the closing stock - HELD THAT - We find that while deciding a similar issue in assessee s own case the coordinate bench of the Tribunal in Addl. CIT v/s Asian Paints Ltd 2022 (7) TMI 1508 - ITAT MUMBAI as respectfully following the earlier decision of the ITAT, Ld.CIT(A) in the present appeal also allowed the same. Considering the fact on record and also this method is consistently followed by the assessee over the years there is no loss to the revenue. Accordingly, we do not find any reason to interfere with the findings of the Ld.CIT(A). Accordingly, ground raised by the revenue is dismissed. Allowance of balance additional depreciation - asset put to use less than 180 days - as submitted that as per the provision to section 32(ii)(b), if the assets are put to use for less than 180 days in the previous year, then the deduction in respect of depreciation shall be restricted to 50%. Accordingly, the assessee could claim only 10% of the additional depreciation for additions made in the second half of the financial year 2010-11 and the balance 10% additional depreciation was claimed in the year under consideration - HELD THAT - We find that the coordinate bench of the Tribunal in assessee s own case cited supra, for the assessment year 2011-12 2022 (7) TMI 1508 - ITAT MUMBAI decided the similar issue in favour of the assessee by following the earlier decisions rendered in assessee s own case it is well settled by a number of judicial precedents that if for use of new plant and machinery for a period of less than 180 days the entire amount of additional depreciation cannot be claimed in the subject assessment year, the balance unclaimed amount can be claimed in the subsequent assessment year. It is also a fact on record, against similar claim allowed by learned Commissioner Appeals) in assessee's own case in Assessment Year 2008- 29, the revenue has not preferred any appeal before the Tribunal. In view of the above, we uphold the decision of Jeaned Commissioner (Appeals) on the issue. Ground raised is dismissed. TDS u/s 194H - Allowance of expenditure incurred on the Trip Scheme - disallowance u/s 40(a)(ia) - assessee is having huge chain of dealers across India and it is incurring expenses under various heads of the consolidated head advertisement promotion expenses - HELD THAT - As decided in 2022 (2) TMI 1428 - ITAT MUMBAI for the assessment year 2010-11, the scheme is closely linked to assessee's business activity. It is also a fact that the assessee has not paid any amount to the dealers and distributors, but amount spent has been paid to SOTC for organizing the trip. It is also a fact on record that the amounts paid to SOTC has been subjected to TDS as per the relevant provision. Therefore, the allegation of the Assessing Officer that the amount has not been subjected to deduction of tax is without any basis. As regards the applicability of section 194H of the Act, by no means, the Assessing Officer has established on record that dealers/distributors are agents of the assessee. Further, as we find, the trip scheme has been introduced by the assessee from past 20 years and the deduction claimed by the assessee on account of such trip scheme has never been disallowed by the Assessing Officer except for the impugned assessment year. Therefore, even applying the rule of consistency, the expenditure claimed by the assessee has to be allowed. Addition on account of waiver of royalty received from two subsidiaries - Royalty is calculated @3% of associated enterprises sales as per the agreement duly signed and executed - HELD THAT - As per section 5(1) of the Act in the case of a resident, the total income, inter-alia, includes all income from whatever sources derived which accrues or arises to him outside India during the year. As per the assessee, it is entitled to receive the Royalty from its overseas subsidiaries @3% on the net sales price of products sold by the overseas subsidiaries. Thus, the net sale price of the products sold can only be determined at the end of the financial year and accordingly, the amount of Royalty payable to the assessee can only be computed thereafter. Therefore, prior to the end of the financial year, no amount accrues or arises to the assessee outside India. In the present case, prior to the determination of the net sale price of the products sold, the assessee had decided to waive Royalty by 2%. No material has been brought on record to show that there is no understanding between the assessee and its overseas subsidiaries to waive the Royalty. Such being the facts, we are of the considered view when only 1% Royalty is payable by the overseas subsidiaries, therefore the AO has no authority to make an addition of the balance 2% Royalty waived by the parties, which is nothing but a notional income considered taxable by the AO in assessee s hands. Before concluding, it is pertinent to note that in the assessment year 2011-12, the coordinate bench of the Tribunal decided a similar issue in favour of the assessee. Accordingly, in view of the aforementioned findings, we find no basis in the impugned addition made by the AO. As a result, ground raised by the Revenue is dismissed. Allowance of Corporate Social Responsibility ( CSR ) expenses - HELD THAT - Explanation-2 to section 37(1) of the Act was introduced from 01/04/2015 and is prospective in nature, therefore CSR expenditures incurred prior thereto are allowable expenditures. We find that the in Pr.CIT v/s PEC Ltd 2022 (12) TMI 759 - DELHI HIGH COURT held that amendment brought by way of Explanation 2 to section 37(1) by Finance Act, 2014, with effect from 1-4-2015 is prospective in nature and thus, CSR expenditure incurred prior to 1-4-2015 was to be allowed. Since, in the present case, it is undisputed that the aforesaid expenditure incurred by the assessee is towards its Corporate Social Responsibility, therefore we find no infirmity in the findings of the learned CIT(A) in allowing the expenditure in the year under consideration. As a result, ground no.8 raised in Revenue s appeal is dismissed. Sundry balances written off - HELD THAT - As per the assessee, it has changed its practice from the assessment year 2012-13, where sundry balances written off is claimed as deduction, and sundry balances written back is offered for tax in its return of income. The assessee submitted that the expenditure is normal business expenditure and allowable as deductible expenditure. However, from the perusal of the record, we find that neither there is an examination of the aforesaid claim of the assessee nor any details were furnished. Accordingly, we deem it appropriate to restore this issue to the file of the AO for de novo adjudication. The assessee is directed to file necessary details/documents in support of its claim of deduction of sundry balances written off. As a result ground raised in Revenue s appeal is allowed for statistical purposes

Summary

Issues Involved:

1. Disallowance under section 14A of the Income Tax Act, 1961.
2. Disallowance of expenditure incurred on feasibility study report.
3. Transfer pricing adjustment on account of non-recovery of charges for providing the letter of comfort/support.
4. Ad hoc addition on account of non-inclusion of damaged stock in valuation of closing stock.
5. Allowability of expenditure under section 35(2AB) of the Act.
6. Allowance of balance additional depreciation.
7. Allowance of expenditure incurred on the Trip Scheme.
8. Deletion of addition on account of waiver of royalty received from two subsidiaries.
9. Allowance of Corporate Social Responsibility (CSR) expenses.
10. Allowance of sundry balances written off.

Summary:

1. Disallowance under section 14A of the Income Tax Act, 1961:
The tribunal found that the Assessing Officer (AO) did not record proper satisfaction regarding the rejection of the assessee's claim and merely proceeded to compute the disallowance under section 14A read with Rule 8D without examining the correctness of the claim. Following the jurisdictional High Court's decision, the tribunal directed the deletion of the disallowance made by the AO under section 14A read with Rule 8D.

2. Disallowance of expenditure incurred on feasibility study report:
The tribunal upheld the findings of the Commissioner of Income Tax (Appeals) [CIT(A)] that the expenditure on the feasibility study report for entering into a new line of business, i.e., home improvements and decor, is capital in nature. However, the tribunal directed the AO to restrict the disallowance only to the extent of expenditure pertaining to the home improvement and decor business.

3. Transfer pricing adjustment on account of non-recovery of charges for providing the letter of comfort/support:
The tribunal held that the letters of comfort issued by the assessee to the banks on behalf of its subsidiaries constitute an international transaction. The tribunal upheld the CIT(A)'s decision to restrict the arm's length rate of the letters of comfort to 0.04%, finding the same to be reasonable.

4. Ad hoc addition on account of non-inclusion of damaged stock in valuation of closing stock:
The tribunal upheld the CIT(A)'s decision to restrict the disallowance to the tune of 0.5% of the value of closing stock for the purpose of valuation of damaged stock, following the consistent approach adopted in earlier years.

5. Allowability of expenditure under section 35(2AB) of the Act:
The tribunal upheld the CIT(A)'s decision to direct the AO to verify the nature of expenditure disallowed by the DSIR and allow the expenditure if it was incurred for R&D purposes. This decision was consistent with the approach adopted in earlier years.

6. Allowance of balance additional depreciation:
The tribunal upheld the CIT(A)'s decision to allow the balance additional depreciation claimed by the assessee for assets acquired in the earlier year, following the consistent approach adopted in earlier years.

7. Allowance of expenditure incurred on the Trip Scheme:
The tribunal upheld the CIT(A)'s decision to allow the expenditure incurred on the Trip Scheme for dealers, finding that the expenditure was incurred for business purposes and was consistent with the approach adopted in earlier years.

8. Deletion of addition on account of waiver of royalty received from two subsidiaries:
The tribunal upheld the CIT(A)'s decision to delete the addition made by the AO on account of waiver of royalty, finding that the waiver was consistent with the financial position of the subsidiaries and was not a notional income.

9. Allowance of Corporate Social Responsibility (CSR) expenses:
The tribunal upheld the CIT(A)'s decision to allow the CSR expenses incurred by the assessee, finding that the expenses were incurred prior to the introduction of Explanation 2 to section 37(1) and were allowable.

10. Allowance of sundry balances written off:
The tribunal restored the issue to the AO for de novo adjudication, directing the assessee to file necessary details/documents in support of its claim of deduction of sundry balances written off.

Conclusion:
The appeal by the assessee was partly allowed, while the appeal by the Revenue was partly allowed for statistical purposes.